How do online payments via credit or debit card work?

Online credit and debit card transactions can be very complex, involving many different entities and several steps.


How do online payments via credit or debit card work?

The process for businesses to accept credit or debit card payments online from customers involves several entities and many steps. Before we explore these in further detail, let’s briefly define some key terms:

  • Merchant account - A specific type of bank account required for a business to accept credit or debit card payments from customers. (Learn more about merchant accounts later in this guide.)
  • Issuer (A.K.A. issuing bank) - A financial institution that provides credit or debit cards to its customers. In the context of this guide, think of it as the customer’s bank.
  • Card association (A.K.A. card network) - A collection of member financial institutions that process card payments based on an agreed set of rules. Major examples are Visa and Mastercard.
  • Acquirer (A.K.A. acquiring bank or merchant bank) - A financial institution that processes a transaction based on information from the issuer and card association. They provide businesses with merchant accounts, and are licensed members of card associations.
  • Payment processor - A term often attributed with varying definitions. In the context of this guide, a payment processor is the facility of an acquirer which transfers transaction details to the relevant card association. (Learn more about payment processors later in this guide.)
  • Payment gateway - Software that facilitates the transfer of a customer’s card details from a merchant’s website to a payment processor. (Learn more about payment gateways later in this guide.)

From the customer completing the merchant’s checkout process, through to the merchant receiving the funds in their bank account, the overall process for online credit and debit card transactions takes place in two broad stages - authorisation, and clearing and settlement.

Authorisation step-by-step

Diagram showing credit or debit card authorisation process

  1. The customer completes the merchant’s checkout process and elects to pay via credit or debit card, submitting their card details.
  2. The merchant securely transfers the transaction information (including these card details) to their payment gateway.
  3. The payment gateway securely transfers the transaction information to the payment processor used by the merchant’s acquiring bank.
  4. The payment processor securely transfers the transaction information to the card association.
  5. The card association securely transfers the transaction information to the customer’s issuing bank, which checks there are sufficient funds to complete the transaction, and also runs checks to ensure the transaction is not fraudulent.
  6. The customer’s issuing bank submits a response to the card association, indicating whether the transaction is approved or declined.
  7. The card association relays this response to the merchant’s payment processor.
  8. The payment processor relays this response to the payment gateway.
  9. The payment gateway informs both the customer and the merchant of the response.

Clearing and settlement step-by-step

Diagram showing credit or debit card clearing and settlement process

  1. At the end of the day, the merchant sends a batch of all authorised transactions from that day to their payment processor.
  2. The payment processor relays these authorised transactions through the relevant card associations.
  3. The merchant’s acquiring bank deposits funds totaling the transaction amounts into their merchant account (deducting any relevant fees).
  4. The card associations (from step 2) debit the customers’ issuing banks for the relevant transaction amounts, then credit the merchants’ acquiring banks (deducting any relevant fees).
  5. The customer’s issuing bank debits the relevant transaction amount from their account (for debit cards), or issues them a statement requesting the amount be paid (for credit cards).
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